Benjamin Franklin on the Minimum Wage

Benjamin Franklin apparently understood the notion that input prices affect product prices, which is a problem because product demand curves are not completely inelastic.  Discussing a minimum wage, he noted, “A law might be made to raise their [workers’] wages; but if our manufactures are too dear, they might not vend abroad.” This is one of the best arguments against a minimum wage: in an open economy, which the U.S. increasingly will be at least partly passed on in the form of higher product prices, which will in turn reduce product demand—and eventually employment.   (“On the Labouring Poor,” The Gentleman’s Magazine, April 1768.)


Matt Sharp

The UK's employment level barely changed when it introduced a minimum wage in the 90s. Surely it depends what level it is set at?

Also, many jobs that pay minimum wage simply can't be exported, because they're in the services sector (though they could in theory be replaced by computers/robots, and probably will one day).

Added to the fact that low-paid people spend a greater proportion of their income, raising the pay of, say, supermarket workers, should in fact stimulate the economy.

matt

Matt,
Causation and correlation are not the same thing. Basically you are saying that since unemployment didn't go up then it was a success. But nevertheless, in 1986 the united kingdom weakened minimum wage laws by limiting wage councils, the result was an drop from 11.2 in 1986 to 6.8 in 1990. Then as they slowly regained power the unemployment in the UK rose back up to 10.3% and then they were completely demolished in 1993 and resulted in a reduction straight down to 6.1% over the next 5 years. Since 1998 minimum wages have been set a a much more manageable rate. This has in large part not kept up with inflation and thus have very little impact on the overall economy, but back in the 80's they had a significant impact on the economy of the UK.
"Also, many jobs that pay minimum wage simply can’t be exported, because they’re in the services sector (though they could in theory be replaced by computers/robots, and probably will one day)."
The reason the majority of minimum wage jobs are in the service industry and not others is a direct result of minimum wages making it unprofitable to operate facilities in countries with strict minimum wage laws. It is the reason that Manufacturing in America and the UK is way down, because labor for some jobs are set above the market price in which case companies are off shoring work. There was an article the other day I read that said that it would cost over $10,000 if the Ipad was made entirely in the USA.
Here is the worst part about minimum wages that never gets discussed.
Say you were making minimum wage and you have worked hard to get raises and are now making $3.00 over minimum wage and the government increases minimum wage by $2.00. Do you think your employer is going to give you a $2.00 raise? No, you just got a paycut because things got more expensive and you are able to purchase less with your money. These are the people that are in real financial trouble. 80% of all minimum wage earners are part time/teenagers/ or second jobs. The people however making slightly over minimum wages are the ones that gets pinched the hardest.
I know this because while I was in school, I had a job making minimum wage and I worked my tail off to make more money I was then making $4 over minimum wage, minimum wage was raised by almost $3.00 and people who got there first raise was making what I had worked 4 years to get to. It was completely demoralizing. Also the things I bought was made by people making close to or minimum wage, and the cost of everything went up. So now new hires were making almost my salary and at the same time I was taking a real pay cut.

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Chad Clayton

The argument simplifies the concept too much. Some examples: Very few markets are perfectly competitive by now as firms have moved to differentiate their products from one another, something which had not begun to as great of a degree by the late 1700s. American goods are generally well-received in foreign markets and in many places (Europe) cheaper than local alternatives. There's also the concept of the efficiency wage; better compensated workers tend to produce more for their employers as they feel more inclined toward loyalty to the firms that employ them. Well-compensated workers are also less likely to quit their jobs saving the firms recruiting and training costs. Raising minimum wages ensures lower-income consumers earn more wages. As the MPC of an individual making low wages is far higher than a well-to-do laborer or employer, more consumption in the economy results in growth and less rigid social stratification.

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JeffB

While that is all true (Econ-101 stuff) it ignores the race to the bottom you get in wages in a system like this. Why stop with minimum wages? Why not add in other interference that artificially raises costs such as OSHA regulations? Where do you stop with this?

We can see the result of no-minimum wages in the early 1900's. That saw effective wage slavery and wages below subsistence levels. I doubt most people would welcome a return to those labor conditions.

Tom G

Slave owners in 1763 thought of themselves as job creators. 250 years later, rich white business owners are successfully making the same arguments.

Jason

"Best" by what standard? It sounds plausible, but from what I can tell, there's scant evidence that Franklin's hypothesis was actually true.

Matt

Henry Ford instituted the 40 hour work week at his factories - something he did without all other industrialists hopping on the bandwagon.

Further, this was not done for humanitarian reasons, but rather for business. Some say he wanted his employees to have enough leisure time in order to perceive the need or purchasing products, others say it was to increase efficiency.

In either case, we know how this went - Ford took the world by storm!

Steve

Perhaps Ford added the 40 hour workweek and increased pay to legitimize his policy of "Americanization" of foreign born employees, along with his special police force.

Voice of Reason

So are we to infer that it would be acceptable to openly have sweatshops running in America?

Alan T

Wages confuse me, for reasons I will list below. If anybody reading this would like to unconfuse me, I would appreciate it.

1. Don't economists expect wages to equal marginal productivity? If this is so, why hasn't the median real wage in the U.S. increased since 1973?

2. Can the productivity of labor even be uniquely defined? If I give you a shovel and tell you to dig a hole, how much of total productivity shall I attribute to you, and how much to the shovel?

3. Don't economists assume that productivity declines as more workers are hired? This makes sense to me for an individual store or factory, but not for a large corporation. Can't a company open a new store or factory, hire new workers, and expect the same productivity as before?

4. Economists expect, on theoretical grounds, that increasing the minimum wage will reduce employment. It seems to be very difficult to confirm this empirically. Is the theory wrong, or is the effect difficult to measure?

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matt

First off we are talking about an economy that meets the requirements of perfect competition in what you are talking about. Which would mean that we would have: Infinite buyers and sellers, no barriers to entry/exit, Perfect factor mobility, perfect information, zero transaction costs, Profit maximization, Homogeneous products, non-increase returns to scale, etc.
This doesn't exist in the real word almost ever, maybe a staple like corn or potatoes on the wholesale market would get close, but they still fall way short. In fact every corporation is founded on competitive advantages, in a situation where perfect competition would happen there would be no competitive advantage for any business in the market. So now that that is understood.
1. Marginal Productivity is not a term I have ever used before, corporations are expected to operate where average total costs are = to marginal costs. Which means they make the maximum profit. When talking about labor the barriers to entry and exit are large, this is a huge problem when maximizing efficiency. Think about how when you get a new job offer most people would stay if their current organization gets close to their new one in salary, well this would never be the case. People get attached to their jobs and thus don't operate at maximum efficiency. Meaning that the market in actuality doesn't work like that. In order for that to be the case you would have an infinite number of jobs doing the same thing you are doing and it would not cost you or your employer a thing to hire or fire you.
2. Yes, it can be defined in marginal terms. labor is just a variable costs, where as the shovel would be a fixed costs. People make big money as consultants by accurately identifying what is the impact of labor. It is not a simple thing, but it can be done.
3. we assume that the law of diminishing marginal returns is in effect, not that each person isn't as productive, but that each unit you produce will cost slightly more than the one before it, after some basic levels are reached. Marginal cost is a check mark, not a straight line going up. Which is why if I have 1 person making a car and I switch to 2 people I might actually have more made at the end of the time period per person, but the difference will start to minimize to a point then turn negative.
4. The problem is that the economy doesn't occur in a vacuum. While can we show on a basic level what is the impact of raising minimum wage in a single instance with everything else held the same in an economy it is impossible to show the direct impact of any one variable. just imagine you have an equation with millions of variables and you only change 1 variable on purpose, while the rest of them are changing every second, and you can only measure the output. Then you are asked how what you changed impacted the output. That is what it is like when you try to show the causation between minimum wages and the effects on an economy.

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Mike B

If someone is working at below their marginal cost of living couldn't that be considered anti-competitive dumping?

hmt

In order to be considered dumping you'd need to be making less than the cost of production. In this case the cost of production of the worker would be the cost's associated with working (transportation to work, higher cost of food at work, tools if required to provide them).

So if Cost of Living (working) - Cost of Living (not-working) >= earned wages then dumping may be occurring.

PF Martins

The flaw in this argument lies in the "but if". I would rebut it by arguing that "manufactures being too dear" is not necessarily a consequence of the raising the lowest wages to a national minimum.

Joe in Georgia

I am confused, Mr. Hamermesh is pro tenure at our overpriced colleges and universities, but he is anti minimum wage for those who live at and below the poverty line. I am really confused.

TexCIS

1. Most minimum wage positions are entry-level, and good employees don't stay at that pay very long. Companies DO pay good workers more to keep them.
2. The fact is that most minimum wage jobs (75%) are held by teenagers and college students, still supported by parents.
3. Increases in minimum wage do inflate the cost of goods sold, and therefore hurt manufacturing sales both locally and abroad.
4. Minimum wage increases affect the very goods and services that the poor consume more than higher earners:
- Wal-mart keeps prices low and stretches the dollars of low-income households. Increase their costs and you increase the prices the poor have to pay.
- Fast-food is consumed by the poor more than wealthy individuals. Increase those costs and you put a strain on the (working) poor especially.

The poor are not being helped if you simultaneously increase their wages and the prices of what they need to purchase to live . . . and they're being hurt if jobs are lost because of mandates on the employers. Net.Loss.

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Tim Erickson

What Dr. Hamermesh fails to address is the potential fallout from not having a minimum wage in the US. Where would wages go for some unskilled workers (2 bucks an hour or less)? Full employment, yes. People living in the equivalent of favelas in East Austin, yes. All minumum wage laws do is ensure that people who work their tails off for 40 hours a week don't live in extreme poverty here at home.

dan

Minimum wage is great, unless you are black. It has hurt blacks more than any other class of worker.

Of course minimum wage is an asinine idea.